The FTSE debate: is the index too concentrated?

The UK market is becoming increasingly concentrated in just three sectors. But while some managers argue that megacaps are important because they are diversified and deliver income others claim investors need an increasingly global outlook.

Figures published by Fidelity last week show that 10 years ago less than a third (31%) of the UK market was concentrated in the three largest sectors.

But since then, the UK stock market’s sector concentration has intensified. Energy, banks and pharmaceuticals now account for 47% of the UK market’s value although this is slightly less than three years ago.

Jorma Korhonen, manager of Fidelity Global Special Situations, argued that this bias means portfolio performance will largely reflect what is happening in these areas. But he added: ‘By taking investment further afield this reliance on particular sectors is diminished.’

However for Simon Murphy, manager of the core M&G UK Growth fund (M&G UK Growth A Acc), having such sector concentration and having the top 10 stocks accounting for 40% of the UK market is not a great problem.

‘A lot of the large companies are very diversified. HSBC is a bank but it is not just a UK but a global franchise with large earnings from Asia. It is not representative of the UK economy.’

He believes he still has plenty of scope to take active positions, for instance holding 3.8% of the fund in Barclays while it makes up 2.5% of the All Share and completely ignoring some big names such as Anglo-American (AAL).

Murphy is also keen on the dividend income streams coming from the UK’s biggest names. ‘Most are paying out a large slug of UK plc’s dividends. The top 10 companies make up 40% of the FTSE All-Share but account for 50% of its yield.’

Tony Nutt, the Citywire A-rated manager of the Jupiter Income Trust (Jupiter Income Trust), who holds stakes in BP (BPA), Shell (RDSB) and Vodafone , said: ‘The worrying thing from my point of view is that it gives me less choice.’

He said he avoids choosing the large names just for their yield and opts mainly for capital growth from names across the market cap scale.